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In a little over two years, Crunchyroll.com became the number one anime Website by offering a multitude of user-uploaded anime videos, many without the permission of the licensor.Now it is making a major change by offering only licensed videos on its site beginning in January, including some, such as Naruto Shippuden episodes, almost immediately after the initial broadcast of the new episode in Japan (see “Crunchyroll Goes Legit”).In Part 1 of this two part interview, Crunchyroll CEO Kun Gao talks about how his site will transform into the newest legitimate channel for distribution of anime.In Part 2, Gao argues that Crunchyroll is the new Toonami for a new generation of anime fans.

Maybe you could start out by giving us a history of Crunchyroll.

Crunchyroll started in the middle of 2006.Three other founders and I were friends.We met at UC Berkeley.We’re all electronic engineering and computer science majors.Back then anime was really picking up everywhere--in the dorms, on campus, people were watching it.We got really into animation.

After we left college in 2004 we all went our separate ways, some of us going to grad school, others working in industry, mostly on consumer facing Websites.Eventually we all met back again and we decided to work on anime as a nights and weekends passion project.We still had work during the day and we were sinking quite a bit of our own money in and maxing out credit cards because the bandwidth bill was so high.It eventually got to a point around the middle of 2007 when all we could do was keep the site up.There were so many things to do.

We voluntarily quit our jobs.It was really a very scary moment because we didn’t know how things were going to turn out, but we had a lot of faith that because we were servicing a lot of passionate fans and were building a site that fans can enjoy, it would turn out for the best.

After that we started talking to venture capitalists.They became very interested because there were so many passionate fans on the site--they were not just into watching content, but also community and the full social networking experience.We received funding from Venrock (that’s the venture arm of the Rockefeller family), in December of 2007.From then on we’ve been very aggressively licensing content, and taking down unlicensed content.

We’ve set up an office in Japan.We actually have a subsidiary now in Japan talking to all the license holders and licensing all the content that we can get our hands on.That’s pretty much where we are now.

You mentioned Venrock, and a month or two ago we did a story about Gonzo also being an investor.Are those the only two investors?

Venrock is the only institutional investor.We have a number of other strategic investors including Gonzo.

What was the original monetization strategy?

I don’t think it’s changed.There haven’t been too many external factors that affected our business plan.What we’ve always looked for are ways to monetize online digitally.Once we monetize we look to revenue share with licensors.That way they can tap into this audience that they’ve never been able to monetize before.The three ways we’re doing that now are:

With ad supported free streaming.That way people can watch content for free but we can serve an ad and we revenue share that with the publishers.

The subscription plan which we’re launching January 8.This includes the hit shows that we’ve licensed such as Naruto Shippuden, Gintama, Skip Beat, Shugo Chara.People can, if they pay a few dollars a month they can watch one hour after it airs in Japan.It’s never been done before.It’s a very exciting time.

We also offer other options such as DTO and also we’re starting to explore virtual merchandising.

We offer a lot of different options for publishers to monetize their content.

How many videos are on the site now and how many will there be on the site after the changeover in January?

How we see it, it’s not really that abrupt a process.The reason is because we’ve actually been transitioning—we’re in the middle of this transition—for the last six to nine months.It really started in April when we put up the first licensed simulcast content.Right now there’s really not that much licensed content on the site, particularly in the United States. In January we hope to have upwards of a hundred, a hundred and fifty titles licensed for the site.

Is there going to be a change in the number of videos available on the site because of the new policy in January?

There’s definitely going to be less videos at the very beginning.But the difference is that the videos we’re going to have are going to be really the best content.Naruto, for example, is the number one anime online.That’s going to be on Crunchyroll.The only place to access it one hour after airtime is to purchase the subscription plan on Crunchyroll.com.Right now we really have a lot of long tail content.Some of this content, it’s a shame, but there are really no more committees for it.There’s no more approval process.There’s really no way for us to get the license sometimes.Unfortunately that will be lost but we’re replacing that with much more quality content going forward, and hopefully that will draw a lot more audience to our site.

How much is your subscription fee?

Normally it’s about twelve dollars.Right now because it’s pre-order we’ve discounted it to about six dollars.So six dollars a month, you can lock in that price if you order now, between now and January 8 when we start the program.We’ve only announced a handful of shows but in the next few weeks we’re going to announce many more shows, much deeper coverage of the content that you’ll be able to watch early as well as high definition.

What are your plans for hi-def—are you going to be delivering any hi-def content?

Yes we are.That’s one of the value propositions that we bring to our subscription plan.People who pay a few dollars a month the not only watch Naruto Shippuden and a number of other shows one hour after it comes out in Japan, they also get it in hi-def.For us hi-def is 720p currently.But we also offer other options—if the bandwidth is not fast enough or the computer might not be able to handle 720p.Some demo clips that we’ve posted online, if you go to the pre-order part of the site you can see what the quality’s going to look like come January.And it looks great.